Up until this point, we've been talking mainly about 401(k) plans. But 401(k) plans are not the only type of tax-deferred retirement plans available to employees.

Public employees and employees of not-for-profit organizations have other types of plans available to them which are similar to a 401(k), but are different when you take a closer look. 403(b) plans are available to employees of public educational organizations and tax-exempt organizations. Section 457 Plans are available to state or local government employees and employees of non-church tax-exempt organizations.

These are plans that are available to employees of public educational organizations and tax-exempt organizations.

403(b) plans, like 401(k) plans, allow you to make elective pre-tax contributions to the plan and to defer tax on income until retirement. Distributions from a 403(b) plan are taxed as ordinary income.

What makes a 401(k) plan different from a 403(b) plan?

The major differences between a 401(k) plan and a 403(b) plan are as follows:

• 403(b) plans have special increased contribution limits for employees who have completed 15 years of service with certain types of organizations. This feature is not available in a 401(k) plan. Other special contribution limits, not available in 401(k) plans, may be available for church employees.
• As we discussed in the previous section, if you take a lump sum distribution from your 401(k) plan, you may qualify for special tax treatment (ten-year averaging), thereby reducing the ordinary income tax you pay on the distribution. A distribution from a 403(b) plan does not qualify for this special tax treatment: lump-sum amounts distributed are treated as ordinary income when received.
• Your company's 401(k) plan may offer many different investment options. In contrast, 403(b) plan investments are limited to annuity contracts and mutual funds.
• Your 403(b) plan benefits that accrued prior to 1987 are not subject to the minimum distribution rules, assuming records have been maintained splitting out your pre-1987 benefits.

403(b) Contribution Limits

The IRS places an annual dollar limit on your pre-tax contributions to a 403(b) plan. The limit is indexed for inflation, so that in future years, the dollar limit may be higher. This limit in 2010 is $16,500 ($16,500 in 2009), plus up to $5,500 ($5,500 in 2009) of catch-up contributions if you are at least age 50. In addition, if you have completed 15 years of service to qualified institutions and meet other conditions, you are eligible for additional Lifetime Catch-up contributions (contact your benefits administrator for details). All pre-tax contributions made to any 403(b), 401(k), SEP, or SIMPLE plan are counted towards these limits.

Overall Contribution Limits

The total annual contribution that can be made in 2010 to your 403(b) plan, as with a 401(k) plan, cannot exceed 100% of your compensation or $49,000 whichever is less ($49,000 in 2009).

If you are eligible to participate in a 403(b) plan, and require more detailed information, contact your benefits department.